Contractors embrace iBuyers
Small firms forced to take lower margins for higher flow of jobs
A truck pulled up alongside a Cinco Ranch home, which a yard sign cheerfully announced had just sold and was for sale once more. “Self-Tour instantly,” the sign exhorted prospective buyers.
But this truck was not filled with prospective buyers. Instead, Bairo Rodriguez hopped out and quickly set to work trimming dead fronds off a sago palm; his cousin, Antonio Rodriguez, began shearing stray branches off a boxwood hedge. Within nine minutes, a third man, Herson Gabriel, had mowed the lawn; in another three, the crew had blown the stray leaves and branches in a pile and raked them into a bag. Three more minutes, and they were off to another of the 365 Houston-area homes owned by the iBuyer Opendoor, where a “Sold!” sign waved 1.1 miles away.
The routine would repeat 20 times that day; CLS Landscaping & Maintenance has so much business from Opendoor, it has hired three additional crews.
“We’ve done 1,500 homes already,” said Junior Montoya, the operations manager of the company, sounding impressed. CLS has worked with Opendoor for one year.
The whiplash speed with which the home had been bought and listed for resale is the name of the game for iBuyers such as Opendoor, companies that buy homes directly from owners. They then turn and list the homes themselves, shouldering the hassle, maintenance and wait that can come with selling.
iBuyers, who have persuaded investors to put more than a bil
lion dollars behind their vision of transforming homeselling from a drawnout process to the frictionless tap of the smartphone, have also been quietly transforming industries catering to the homeselling business. At the same time, they have used their scale and economic muscle to keep costs down, often forcing small, independent businesses to accept lower margins in exchange for a high volume of consistent work.
An army of landscapers, painters, contractors and cleaners work on homes that iBuyers purchase with the aim of getting them ready for the market within a few weeks. In the Houston region alone, Opendoor has spent more than $11 million on an undisclosed number of contractor services since launching here roughly a year ago. Zillow Offers declined to disclose how much it had spent on contractors in the Houston market, but across the country, it spent $15.4 million fixing up 1,211 homes in the third quarter.
The large sums of money being spent on vendors such as landscapers, painters and electricians — often mom-and-pop operations — have provided contractors a large and steady flow of work and hint at the potential impact of quickly scaling iBuyers on local contractors. In the Houston area, there are roughly 90,000 landscapers, painters and other workers in trades from which iBuyers need vendors.
It is a development that has been greeted with a mix of enthusiasm and caution.
Volume and pressure
On a recent Wednesday, pounding could be heard outside a Sugar Land home.
Drew Kayes, who oversees repairs and maintenance for Opendoor’s Houston homes, walked out with an iPad and glanced up at the sound, which was coming from a contractor opening and closing the windows — part of a checklist to make sure the house was in working condition before it hit the market.
“I was just looking at it,” Kayes said, motioning at his tablet, where he can track line-item repairs requested on the home through Opendoor’s portal. “It’s mainly cosmetic stuff here.”
Inside, the home smelled of fresh paint. Two 16packs of soft white bulbs sat on the granite kitchen counter — the light fixtures had recently been changed — and Logan Guthrie, owner of Logan’s General Contracting of Missouri City, was overseeing a crew that was clearing out the attic and installing door stops.
Guthrie isn’t an Opendoor employee — he’s an independent contractor approved to take Opendoor jobs. Most iBuyers outsource repair and maintenance work, although Offerpad often hires them on as employees with benefits, citing the need to ensure quality and efficiency.
Guthrie went through Opendoor’s onboarding a year ago — it takes about an hour to learn how to use Opendoor’s portal — and has been ramping up with the work ever since.
“I’m expanding,” Guthrie said. “Contractors I used maybe once a month before… now I’m using them every week. Sometimes on multiple houses a week.” Opendoor currently accounts for about 70 percent of his business.
Jeff Perry of Fast Track Remodeling compared Zillow’s iBuying platform to a spigot supplying contractors with a steady flow of jobs.
“iBuyers are able to bring consistency to the market place for contractors,” he said. He, too, is planning to add more crews.
At the same time, iBuyers’ use of contractors also mirrors trends seen throughout the tech industry. They’ve built platforms that nurture a gig economy while insulating themselves from the need to pay for costs such as insurance. Just as Amazon markets its need for delivery services as an opportunity for entrepreneurship, Opendoor has marketed its need for contractors as a way to build a business: On its vendor partnerships webpage is the story of a woman who went from cleaning homes on the weekends to building a cleaning business with 35 employees across three states.
Both companies keep extensive data on contractors’ past performance, which they use to determine future job allocation.
“If I had a laptop, I could tell you exactly how many jobs he’s done,” said Kayes, nodding at Guthrie. He could also pull up the average completion time for a Logan’s General Contracting project and whether the inspectors hired by potential homebuyers have ever found problems with the company’s work.
Zillow also collects data, which it shares with contractors each month in the form of a scorecard.
“We use that as a conversational piece to track monthly how they’re doing and award jobs for the next month,” said Joshua Swift, senior vice president of acquisitions and operations at the company.
Note of caution
But for all the excitement generated by the large-scale clients, there are some who are wary. There’s a historical precedent for companies buying thousands of homes and hiring contractors to repair them. After the 2008 housing bust, hedge funds and other large investors began buying up singlefamily homes en masse and converting them into rentals (many of those players now work for iBuying companies).
Tom Perry, Jeff Perry’s older brother, was among those contracted to help fluff homes before they were flipped. He said institutional investors had facilitated fast growth but did not turn out to be reliable sources of revenue.
The single-family rental investor Silver Bay Realty Trust, with whom Perry said he did $750,000 worth of work, pulled out of the Houston market in 2015. Another rental investor, BLT Homes, tried to reset the parameters of its agreement after the first year, according to Perry.
When it tried to negotiate a deal in which it would buy materials instead of his company, Perry balked because the arrangement would eat into his margins.
“Be very cautious,” Tom Perry said. “Because as you scale and grow, your exposure to that client grows.”
It’s not clear how much contractors working for iBuyers are paid compared with their counterparts, although Swift said they are willing to work at a discount in exchange for a dependable, high volume of work. But Offerpad, which began allowing some buyers to customize their homes before move-in, may provide a clue.
The company says its inhouse renovation crews will upgrade floors, countertops and lighting fixtures at cost.
“The $5,000 quartz countertops that once seemed unfathomable, you can now receive at cost for $3,000, with an additional small monthly amount included in your mortgage,” Cortney Read, Offerpad’s director of communications, said in a news release.
Offerpad, Zillow and Opendoor have also used their size as a way to secure deals on common supplies, such as paint.
Maintenance, on top of taxes, insurance and utility costs, is also a reason why iBuyers struggle with profit margins — Zillow Offers lost an average of $4,826 on each home it sold in the third quarter.
Regarding the lower margins for contractors, Jeff Perry said Fast Track Remodeling would not take a job if it did not make economic sense.
“If we only wanted jobs from Zillow, we could sustain our business doing that,” he said.
The steady flow of work also cuts down on certain costs for contractors. Now when companies try to sell Guthrie advertising, he politely declines. He doesn’t need to pay to reach additional clients.
“I don’t want to waste time on a radio ad now,” he said. “I stay busy.”